[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-109032-23]
RIN 1545-BQ79
Recapture of Interest on Excess Credits under the Families First Act, CARES Act,
and ARP
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document sets forth proposed regulations providing that the IRS will
assess as an underpayment of tax any overpayment interest paid to a taxpayer on an
erroneous refund of the employment tax credits provided under the Families First
Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act,
and the American Rescue Plan Act of 2021. These proposed regulations affect
businesses, tax-exempt organizations, and certain governmental entities that claim the
paid sick leave credit and the paid family leave credit under the Families First
Coronavirus Response Act and the American Rescue Plan Act of 2021, and that claim
the employee retention credit under the Coronavirus Aid, Relief, and Economic Security
Act and the American Rescue Plan Act of 2021.
DATES: Written or electronic comments and requests for a public hearing must be
received by [INSERT DATE 45 DAYS AFTER DATE OF PUBLICATION IN THE
FEDERAL REGISTER].
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at http://www.regulations.gov (indicate
IRS and REG-109032-23) by following the online instructions for submitting comments.

Requests for a public hearing must be submitted as prescribed in the “Comments and
Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking
Portal, comments cannot be edited or withdrawn. The Department of the Treasury
(Treasury Department) and the IRS will publish for public availability any comments
submitted to the IRS’s public docket. Send paper submissions to CC:PA:01:PR (REG109032-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
Andrew Holubeck at (202) 317-4774 (not a toll-free number); concerning submissions of
comments and/or requests for a public hearing, Vivian Hayes by email at
publichearings@irs.gov (preferred) or by phone at (202) 317-6901 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
I. Statutes Providing Employment Tax Credits for COVID-19 Relief
The Families First Coronavirus Response Act (Families First Act), Public Law
116-127, 134 Stat. 178 (March 18, 2020), as amended and extended by the COVIDrelated Tax Relief Act of 2020 (Tax Relief Act), enacted as Subtitle B of Title II of
Division N of the Consolidated Appropriations Act, 2021, Public Law 116-260, 134
Stat.1182 (December 27, 2020), provided COVID-19 related economic relief that
included paid sick and family leave credits to eligible employers with respect to qualified
leave wages paid for a period of leave taken beginning April 1, 2020, and ending March
31, 2021. The American Rescue Plan Act of 2021 (ARP), Public Law 117-2, 135 Stat. 4
(March 11, 2021), provided similar paid leave credits under sections 3131, 3132, and
3133 of the Code with respect to qualified leave wages paid for a period of leave taken
beginning April 1, 2021, and ending September 30, 2021.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public
Law 116-136, 134 Stat. 281 (March 27, 2020), as amended and extended by the
Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), enacted as Division
EE of the Consolidated Appropriations Act, 2021, provided an employee retention credit
(ERC) with respect to qualified wages paid after March 12, 2020, and before July 1,
2021, respectively. The ARP provided a substantially similar ERC under section 3134 of
the Code with respect to qualified wages paid after June 30, 2021, and before January
1, 2022.1
The paid sick and family leave credits under the Families First Act and sections
3131 through 3133 of the Code and the ERC under the CARES Act and section 3134 of
the Code (collectively, COVID-19 credits) are refundable credits, meaning that if the
amount of the credits exceeds the taxes against which the credits are taken, then this
excess is treated as an overpayment that is refunded under sections 6402(a) and
6413(b). Any amount of the COVID-19 credits claimed by a taxpayer that is treated as
an overpayment under section 6402(a) or section 6413(b), is refunded or credited to the
taxpayer. Any such refund to which the taxpayer is not entitled, is an erroneous refund
that the taxpayer must repay.
II. Assessment Authority
Section 6201 authorizes and requires the Secretary to determine and assess tax
liabilities, including interest, additional amounts, additions to the tax, and assessable
penalties. The Code or other statutory authority described herein provides for the
administrative recapture of certain erroneous refunds of the COVID-19 credits either by
Section 80604 of the Infrastructure Investment and Jobs Act (Infrastructure Act), Public Law 117-68, 135 Stat. 429
(November 15, 2021), amended section 3134(n) of the Code to provide that the ERC under section 3134 applies
only to wages paid after June 30, 2021, and before October 1, 2021 (or, in the case of wages paid by an eligible
employer which is a recovery startup business, January 1, 2022). Therefore, the only type of employer eligible for
the ERC for wages paid after September 30, 2021, and before January 1, 2022, is an employer that meets the
definition of a recovery startup business under section 3134(c)(5). See Notice 2021-65, 2021-51 IRB 880 (December
20, 2021) for guidance for employers that received an advance payment of the ERC or reduced tax deposits in
anticipation of the credit for the fourth quarter of 2021 prior to the amendments made by the Infrastructure Act.
directly authorizing the assessment of the erroneous refunds or by authorizing the
promulgation of regulations or other guidance to do so.
Specifically, regarding paid sick and family leave credits, sections 7001(f) and
7003(f) of the Families First Act and sections 3131(g) and 3132(g) of the Code provide,
in relevant part, that the Secretary shall provide such regulations or other guidance as
may be necessary to carry out the purposes of the credits, including regulations or other
guidance to prevent the avoidance of the purposes of the limitations under those
provisions and to recapture the benefit of the credit where there is a subsequent
adjustment to the credit.
Regarding the ERC, section 2301(l) of the CARES Act, as amended by sections
206 and 207 of the Relief Act, provides that the Secretary shall issue such forms,
instructions, regulations, and other guidance as are necessary to prevent the avoidance
of the purposes of the limitations under section 2301 of the CARES Act.
Correspondingly, section 3134(m)(3) of the Code provides, in relevant part, that the
Secretary shall issue such forms, instructions, regulations, and other guidance as are
necessary to prevent the avoidance of the purposes of the limitations under section
3134.
III. Regulations for the Recapture of Erroneous Refunds of COVID-19 Credits
Under the authority provided by the Families First Act, the CARES Act, and the
ARP, the Treasury Department and the IRS published regulations (TD 9978) in the
Federal Register on July 26, 2023 (88 FR 48118) under sections 3111, 3131, 3132,
3134, and 3221 of the Code (collectively, Recapture Regulations) that provide for the
administrative recapture of erroneously refunded COVID-19 credits. Under the
Recapture Regulations, erroneous refunds of COVID-19 credits are treated as
underpayments of the taxes imposed under section 3111(a) or (b), as applicable, and
so much of the taxes imposed under section 3221(a) as are attributable to the rate in

effect under section 3111(a) or (b), as applicable, and are, therefore, subject to
assessment and administrative collection procedures. The Recapture Regulations allow
the IRS to prevent the avoidance of the purposes of the limitations under the credit
provisions and to recover the erroneous refund amounts efficiently while also preserving
administrative protections afforded to taxpayers with respect to contesting their tax
liabilities under the Code and avoiding unnecessary costs and burdens associated with
litigation.
IV. Interest on Overpayments under Section 6611
Section 6611 provides that interest shall be allowed and paid on any
overpayment in respect of any Internal Revenue tax at the overpayment rate
established under section 6621. Section 6611(b)(2) provides that interest shall be
allowed and paid in the case of a refund from the date of the overpayment to a date
(determined by the Secretary) preceding the date of the refund check by not more than
30 days. When a taxpayer files an amended return, such as Form 941-X, Adjusted
Employer's Quarterly Federal Tax Return or Claim for Refund, claiming COVID-19
credits that were not claimed on the originally filed return and resulting in an
overpayment, interest is allowed under section 6611 on any overpayment refunded to
the taxpayer.
While the Recapture Regulations provide for the assessment of erroneous
refunds of COVID-19 credits as an underpayment of certain employment taxes, they do
not address overpayment interest paid to a taxpayer on an erroneous refund. These
proposed regulations provide for the assessment of this interest as an underpayment of
tax.
The Families First Act, CARES Act, and the Code as amended by the ARP
authorize and require the Secretary to issue regulations to prevent the avoidance of the
limitations placed on the credits by these statutes. When a taxpayer is issued an

erroneous refund of COVID-19 credits for which the taxpayer is not eligible, the
taxpayer incurs a liability to repay that refund. The taxpayer also incurs a liability to
repay any overpayment interest paid on the erroneous refund. In pursuing collection of
these liabilities, the IRS is enforcing the statutory limitations on the COVID-19 credits
that made the taxpayer’s refund, and any accompanying overpayment interest,
erroneous. Regulations providing for the administrative recapture of overpayment
interest paid on refunds subsequently determined to be erroneous assist in resolving
taxpayers’ repayment liabilities while also preserving administrative protections afforded
to these taxpayers with respect to contesting their tax liabilities under the Code and
avoiding unnecessary costs and burdens associated with litigation.
Accordingly, under the authority granted by the Families First Act, CARES Act,
and the Code, these proposed regulations would amend the Employment Tax
Regulations (26 CFR part 31) under sections 3111, 3131, 3132, 3134, and 3221 to
provide that overpayment interest paid to taxpayers on erroneous refunds of COVID-19
credits is treated as an underpayment of the applicable employment taxes and may be
assessed and collected by the IRS in the same manner as the taxes.
Explanation of Provisions
These proposed regulations would provide that any overpayment interest paid
under section 6611 to an employer for an erroneous refund of the COVID-19 credits will
be treated as an underpayment of the taxes imposed under section 3111(a) or (b), as
applicable, and so much of the taxes imposed under section 3221(a) as are attributable
to the rate in effect under section 3111(a) or (b), as applicable, and may be assessed
and collected by the Secretary in the same manner as the taxes. These proposed
regulations would be applicable to all interest amounts paid under section 6611 on or
after [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER] for any
erroneous refund of the COVID-19 credits.

Special Analyses
I.

Regulatory Planning and Review—Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury Regulations

under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS
are not subject to the requirements of section 6 of Executive Order 12866, as
amended. Therefore, a regulatory impact assessment is not required.
II.

Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary

certifies that these proposed regulations would not have a significant economic impact
on a substantial number of small entities because these proposed regulations impose
no compliance burden on any business entities, including small entities. Although these
proposed regulations would apply to all taxpayers eligible for the employment tax credits
under the Families First Act, the CARES Act, and sections 3131, 3132, and 3134 of the
Code, including small businesses and tax-exempt organizations with fewer than 500
employees, and would therefore be likely to affect a substantial number of small entities,
the economic impact would not be significant. These proposed regulations do not affect
the taxpayer’s employment tax reporting or the necessary information to substantiate
entitlement to the credits. Rather, these proposed regulations merely implement the
statutory authority granted under the Families First Act, the CARES Act, and the Code
as amended by the ARP to issue regulations or other guidance to prevent the
avoidance of the purposes of the limitations under these provisions by providing that
overpayment interest paid to taxpayers on erroneous refunds of COVID-19 credits is
treated as an underpayment of the applicable employment taxes and may be assessed
and collected by the IRS in the same manner as the taxes.
III.

Section 7805(f)

Pursuant to section 7805(f) of the Code, these proposed regulations have been
submitted to the Chief Counsel of the Office of Advocacy of the Small Business
Administration for comment on its impact on small business.
IV.

Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires that

agencies assess anticipated costs and benefits and take certain other actions before
issuing a final rule that includes any Federal mandate that may result in expenditures in
any one year by a State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed
regulations do not include any Federal mandate that may result in expenditures by
State, local, or Tribal governments, or by the private sector, in excess of that threshold.
V.

Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from publishing any rule

that has federalism implications if the rule either imposes substantial, direct compliance
costs on State and local governments, and is not required by statute, or preempts State
law, unless the agency meets the consultation and funding requirements of section 6 of
the Executive order. These proposed regulations do not have federalism implications,
do not impose substantial direct compliance costs on State and local governments, and
do not preempt State law within the meaning of the Executive order.
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published in the
Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office, Washington, DC
20402, or by visiting the IRS website at https://www.irs.gov.
Comments and Requests for a Public Hearing

Before these proposed amendments to the final regulations are adopted as final
regulations, consideration will be given to any comments that are submitted timely to the
IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury
Department and the IRS request comments on all aspects of the proposed regulations.
Any comments submitted will be available at https://www.regulations.gov or upon
request. A public hearing will be scheduled if requested in writing by any person who
timely submits electronic or written comments. Requests for a public hearing are also
encouraged to be made electronically. If a public hearing is scheduled, notice of the
date, time, and place for the public hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is NaLee Park, Office of the
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment
Taxes). However, other personnel from the Treasury Department and the IRS
participated in the development of these proposed regulations.
List of Subjects in 26 CFR 31
Employment taxes, Fishing vessels, Gambling, Income taxes, Penalties,
Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social
security, Unemployment compensation.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend 26 CFR
part 31 as follows:
PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT
SOURCE
Paragraph 1. The authority citation for part 31 continues to read in part
as follows:
Authority: 26 U.S.C. 7805.

*****
Section 31.3111–6 also issued under secs. 7001 and 7003, Public Law
116–127, 134 Stat. 178, and sec. 2301, Public Law 116–136, 134 Stat. 281.
*****
Section 31.3131-1 also issued under 26 U.S.C. 3131(g).
Section 31.3132-1 also issued under 26 U.S.C. 3132(g).
Section 31.3134-1 also issued under 26 U.S.C. 3134(m)(3).
Section 31.3221–5 also issued under secs. 7001 and 7003, Public Law
116–127, 134 Stat. 178, and sec. 2301, Public Law 116–136, 134 Stat. 281.
*****

Par. 2. Section 31.3111-6 is amended by:
a. Redesignating paragraph (e) as paragraph (f) and adding new
paragraph (e); and
b. Revising newly redesignated paragraph (f).
The addition and revision read as follows:
§31.3111-6 Recapture of credits under the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and Economic Security Act.
*****
(e) Recapture of interest on erroneously refunded credits under the Families First
Act and CARES Act. For purposes of this section, any overpayment interest paid under
section 6611 to an employer, or any third party payor as described in paragraph (d) of
this section, with respect to an erroneous refund amount described in paragraph (a) or
(b) of this section shall also be treated as an underpayment of the taxes imposed under
section 3111(a) of the Code and may be assessed and collected by the Secretary in the
same manner as the taxes.

(f) Applicability date. This section applies to all credit refunds under sections
7001 and 7003 of the Families First Act (including any increases in those credits under
section 7005 of the Families First Act), as modified by section 3606 of the CARES Act,
advanced or paid on or after July 24, 2020, and all credit refunds under section 2301 of
the CARES Act advanced or paid on or after July 24, 2020, except that paragraph (e) of
this section applies to all interest amounts paid under section 6611 on or after [INSERT
DATE OF PUBLICATION IN THE FEDERAL REGISTER] for any erroneous refund
described in paragraph (a) or (b) of this section.
Par. 3. Section 31.3131-1 is amended by:
a. Redesignating paragraph (d) as paragraph (e) and adding new
paragraph (d); and
b. Revising the newly redesignated paragraph (e).
The addition and revision read as follows:
§31.3131-1 Recapture of credits.
*****
(d) Recapture of interest on erroneously refunded credits. For purposes of this
section, any overpayment interest paid under section 6611 to an employer, or any third
party payor as described in paragraph (c) of this section, with respect to an erroneous
refund amount described in paragraph (a) of this section shall also be treated as an
underpayment of the taxes imposed under section 3111(b) and so much of the taxes
imposed under section 3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, and may be assessed and collected by the Secretary in the
same manner as the taxes.
(e) Applicability date. This section applies to all credit refunds under section 3131
(including any increases in those credits under section 3133), advanced or paid on or
after September 8, 2021, except that paragraph (d) of this section applies to all interest

amounts paid under section 6611 on or after [INSERT DATE OF PUBLICATION IN
THE FEDERAL REGISTER] for any erroneous refund described in paragraph (a) of this
section.
Par. 4. Section 31.3132-1 is amended by:
a. Redesignating paragraph (d) as paragraph (e) and adding new
paragraph (d); and
b. Revising the newly redesignated paragraph (e).
The addition and revision read as follows:
§31.3132-1 Recapture of credits.
*****
(d) Recapture of interest on erroneously refunded credits. For purposes of this
section, any overpayment interest paid under section 6611 to an employer, or any third
party payor as described in paragraph (c) of this section, with respect to an erroneous
refund amount described in paragraph (a) of this section shall also be treated as an
underpayment of the taxes imposed under section 3111(b) and so much of the taxes
imposed under section 3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, and may be assessed and collected by the Secretary in the
same manner as the taxes.
(e) Applicability date. This section applies to all credit refunds under section 3132
(including any increases in those credits under section 3133) advanced or paid on or
after September 8, 2021, except that paragraph (d) of this section applies to all interest
amounts paid under section 6611 on or after [INSERT DATE OF PUBLICATION IN
THE FEDERAL REGISTER] for any erroneous refund described in paragraph (a) of this
section.
Par. 5. Section 31.3134-1 is amended by:

a. Redesignating paragraph (d) as paragraph (e) and adding new
paragraph (d); and
b. Revising the newly redesignated paragraph (e).
The addition and revision read as follows:
§31.3134-1 Recapture of credits.
*****
(d) Recapture of interest on erroneously refunded credits. For purposes of this
section, any overpayment interest paid under section 6611 to an employer, or any third
party payor as described in paragraph (c) of this section, with respect to an erroneous
refund amount described in paragraph (a) of this section shall also be treated as an
underpayment of the taxes imposed under section 3111(b) and so much of the taxes
imposed under section 3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, and may be assessed and collected by the Secretary in the
same manner as the taxes.
(e) Applicability date. This section applies to all credit refunds under section 3134
advanced or paid on or after September 8, 2021, except that paragraph (d) of this
section applies to all interest amounts paid under section 6611 on or after [INSERT
DATE OF PUBLICATION IN THE FEDERAL REGISTER] for any erroneous refund
described in paragraph (a) of this section.
Par. 6. Section 31.3221-5 is amended by:
a. Redesignating paragraph (e) as paragraph (f) and adding new
paragraph (e); and
b. Revising the newly redesignated paragraph (f).
The addition and revision read as follows:

§31.3221-5 Recapture of credits under the Families First Coronavirus Response
Act and the Coronavirus Aid, Relief, and Economic Security Act.
*****
(e) Recapture of interest on erroneously refunded credits under the Families First
Act and CARES Act. For purposes of this section, any overpayment interest paid under
section 6611 to an employer, or any third party payor as described in paragraph (d) of
this section, with respect to an erroneous refund amount described in paragraph (a) or
(b) of this section shall also be treated as an underpayment of the taxes imposed under
section 3221(a) and may be assessed and collected by the Secretary in the same
manner as the taxes.
(f) Applicability date. This section applies to all credit refunds under sections
7001 and 7003 of the Families First Act, as modified by section 3606 of the CARES Act,
advanced or paid on or after July 24, 2020, and all credit refunds under section 2301 of
the CARES Act advanced or paid on or after July 24, 2020, except paragraph (e) of this
section applies to all interest amounts paid under section 6611 on or after [INSERT
DATE OF PUBLICATION IN THE FEDERAL REGISTER] for any erroneous refund
described in paragraph (a) or (b) of this section.

Douglas W. O’Donnell,

Deputy Commissioner.

[FR Doc. 2024-14167 Filed: 7/1/2024 8:45 am; Publication Date: 7/2/2024]